Timing Is Everything with IRA Distributions

Physician's Money Digest, December 2005, Volume 12, Issue 16

Wall Street Journal

Be careful when dipping into your IRAaccount to cover the costs of higher education,or you may be subject to a 10% taxon early distributions. According to the, Linda Louise Lodder-Beckert sought to transfer funds from herpublic-employee retirement account to anIRA when she stopped working to attendcollege in 1999, but was told pending legislationwould add interest to her accountretroactively. Instead, she deferred thetransfer and paid for education costs withstudent loans and credit cards. Once legislationpassed, Lodder-Beckert transferredthe funds to an IRA in 2001, reapedthe benefits, and took two distributions,using part of the money to pay credit carddebt incurred from her education. The USTax Court, however, ruled that she couldnot escape the 10% additional tax for anypart of the distribution used for her educationexpenses during 1999 and 2000.That's because the 10% additional tax fortaking early distributions from an IRA beforeage 591/2 is not applied if the distributionsdo not exceed education expensesfor the taxable year of distribution. Formore information, see IRS Publication 590at www.irs.gov/pub/irs-pdf/p590.pdf.